Interest on Fixed Deposits Cannot Be Treated as Corpus Without Specific Donor Direction: HC

Case: St. Joseph’s Development Trust v. Income-tax Officer (Exemption)

ITA Nos.: 124 of 2026

Court: Madras High Court

Assessment Year: 2017-18

Date of Order: 17 August 2026

Brief Facts:

• The assessee was a public charitable trust registered under section 12AA.

• The trust filed its return declaring nil income. During scrutiny, the Assessing Officer noted that the trust had earned fixed deposit interest.

• Out of this interest, some amount was credited to the Income and Expenditure Account, while the balance amount, along with savings bank interest and other

  income was directly credited to a capital fund titled “SJDT Sustainable Fund” in the

  Balance Sheet.

• The assessee claimed that these amounts represented funds received from Self-Help

  Groups (SHGs) and foreign donors and were held by it as a custodian, to be returned

  along with accrued interest.

• The Assessing Officer rejected the claim and treated it as taxable revenue income on

  the ground that the requirements of section 11(1)(d) were not satisfied.

• The National Faceless Appeal Centre (NFAC) and ITAT upheld the addition.

• The assessee thereafter approached the High Court.
  

Observations:

The High Court observed that:

• Section 11(1)(d) grants exemption to voluntary contributions only where there is a

  specific written direction from the donor that such contribution shall form part of the

  corpus.

• The Court noted that although the assessee relied upon correspondence from foreign

  donors such as Secours Catholique, CBM and Kinder Not Hilfe, these documents

  merely indicated that the original grants were intended for micro-credit programmes

  and revolving loan funds.

• Further, they did not contain any specific direction that interest earned on fixed

  deposits from such funds would automatically form part of the corpus.

• The Court distinguished the decision in CIT (Exemption) v. Mata Amrithanandamayi

  Math, observing that in that case the donors had expressly directed that interest earned

  on their contributions should be added to the corpus.

• In the present case, no such explicit donor direction existed. Therefore, the interest

  earned on the fixed deposits constituted revenue receipt and was required to be

  accounted for through the Income and Expenditure Account.

• The Court also rejected the assessee’s contention that it was merely a custodian of

  SHG funds.

• It observed that the funds had been deposited in fixed deposits in the name of the

  assessee-trust and the interest was generated through the trust’s own investments.

  Significantly, the assessee had also claimed credit for TDS deducted on the entire

  interest income. According to the Court, the assessee could not simultaneously claim

  TDS credit on the interest while excluding that interest from its gross income.

• Further, the Court held that any subsequent obligation or agreement to utilise the

  interest for SHGs would constitute application of income and not diversion of income

  by overriding title.

• Each assessment year is an independent unit, and the fact that similar interest income

  may not have been taxed in an earlier assessment year could not prevent the Revenue

  from correctly taxing it in the year under consideration.
  

Accordingly, the High Court held that interest earned on fixed deposits cannot be treated as

corpus merely because the underlying funds were received from donors or SHGs. In the

absence of a specific written direction from the donors that such interest should form part of

the corpus, the interest constitutes taxable revenue receipt. The Court further held that

subsequent utilisation of such interest towards SHGs amounts to application of income and

not diversion by overriding title. Accordingly, the Court upheld the ITAT’s order treating it as

taxable interest income, answered the substantial questions of law in favour of the Revenue,

and dismissed the assessee’s appeal.